Unlike “entitlements,” the word “austerity” has come to mean something akin to “godliness” in modern political circles. And along with austerity goes the concept of running the government’s balance sheet like a personal budget. Everyone, from President Obama to his bitterest rivals, have been known to stick a pointer finger in the air and demand, “I wouldn’t run my family’s finances that way, and neither should Washington!”

When I say I don’t agree, it isn’t with everyone. It’s just with the political soundbite and the conventional wisdom; austerity, for a government facing a growing deficit and struggling economy, isn’t at all desirable. And no, the government should not run its budget in any way like the budget of a home — at least, not in the way politicians and pundits are suggesting. Let me explain.

What is austerity?
Let’s begin with “austerity,” a word which seems very close in dictionary definition to “frugality,” and what it has come to mean in global finance.

As James Surowiecki wrote in the New Yorker‘s “Financial Page” earlier this month, Republicans in Washington are pushing for austerity that will look like cuts in “public spending — on infrastructure, basic research, and defense,” and for a wholesale halt to all “stimulus” type spending; anything that the government can do to actually create jobs (think the Civilian Conservation Corps after World War II) and, as Surowiecki posits, “it’s possible that Republicans will block the extension of unemployment-insurance benefits and of the current payroll-tax cut.”

In other words, for most Republicans — and many Democrats as well — “austerity” means something like this: reducing spending, especially on support for groups benefiting from so-called entitlements — the low-income, the older Americans, the mentally ill — yet continuing to support businesses through tax breaks and incentives.

Another way of looking at austerity through the eyes of modern American politics is that it is meant paradoxically to decrease spending on Americans while expecting that Americans will increase spending (through jobs, is the hope of those who use the term “job creators” as shorthand for “upper class and businesses,” supplied by the private sector) and, eventually, grow the economy by the very strength of their frugal will, and eventually, put more money back in the public coffers. In Europe, this pro-austerity point of view is more about maintaining faith in a country’s financial health, and therefore keeping bond rates low; in the U.S., that’s either working or not a concern, depending on how you interpret the market data.

Looking at the past
Historical data on government-mandated austerity is inauspicious at best. In an illuminating and prescient series of reports by NPR’s Planet Money team, two similar countries, Jamaica and Barbados, were analyzed as they both suffered financial crises. Both went to the IMF for foreign currency loans in the early 1990s, and both were told they were going to have to take austerity measures to make sure this situation didn’t happen again.

The IMF has two suggestions:

devalue currency, or

cut government services

Most countries simply cut government services, as the U.S. is planning to do do. When the people of the country have less money in their pockets, the idea goes, they can’t buy so much — so that foreign money comes into the country via tourism and trade, but the people aren’t spending it on foreign goods (because they’re too poor), re-establishing a balance.

In Jamaica, the government sucked it up and cut services. Classrooms got bigger; infrastructure support was cut; public service jobs were eliminated. But in Barbados, the unions, the government, and businesses got together and negotiated a deal: keep all government services in place, keep classrooms small and public health services running, but workers would get an across-the-board 8% pay cut. To make up for that, businesses agreed not to raise prices, but accept smaller margins on goods in inflationary situations.

Two decades later, things have gone from bad to worse in Jamaica, while Barbados’ economy is strong. As the Planet Money commentators reported, today:

Median income in Barbados is twice what it is in Jamaica. Literacy rate in Barbados, over 95% … in Jamaica, it’s estimated that a fifth of the population is functionally illiterate. And Jamaica has one of the highest murder rates in the world, while Barbados is near the bottom.

Given our country’s size, and the near-constant change in the tone and party of leadership, it’s unlikely that we’d end up like Jamaica — not, at least, in many respects. But economists agree that the very worst thing to do in a period of joblessness is to reduce spending. An economy will not improve (at least not quickly) if you take away income from the people most likely to spend it right away.

Running the government like a family
How can you improve revenue in a tight economy with very high unemployment? By putting people to work. And historically in economies like the U.S., that has best been accomplished by giving them government jobs.

My own grandfather was one of the three million men employed by the Civilian Conservation Corps, a model many pundits believe should be duplicated today. That would put money in people’s pockets, stimulating the economy, increasing the prospects for businesses so they could hire more people, thereby increasing tax revenue and decreasing the need for services — while the deficit would at first increase, it would quickly decrease until our budget was more manageable.

That’s not what is happening. Instead, we are — as politicians say — running our government like a family. The problem is that government should not be run like a family, as its mission is very different than that of a family. Let me make an analogy that may seem Swiftian but I believe is, in fact, simply a reflection of our modern political will.

As government’s debt increases, Washington has moved to take away services from the weakest members of society — those who have been unemployed for many months, older Americans who are dependent on Medicare and Medicaid, families struggling below the poverty line, families with mentally ill children or adults.

If we were to compare this to our own families, it would be something like this: Dad lost his job and Mom’s hours were cut. We have to pay our rent and our utilities and buy food and pay the credit card bill. But we have to live within our means! Let’s stop paying to feed and clothe this four-year-old with severe ADHD (he’s so hard to deal with and makes Mom miss work all the time). And Dad can go too (he should just look harder for a job — he needs more of an incentive to get back to work!).

So, maybe a government should be like a family, but in this way: Just as we don’t pull services (food and a key to the front door) out from under members of our immediate family when they’re not producing, a government will end up with bigger problems if it does the same.

A higher calling
But a government’s potential problems are different than a family’s. A government does not have a finite time frame, and will not stand to inherit money when Aunt Sue dies. A government must be concerned with the impacts of its fiscal decisions on both a huge variety of stakeholders — citizens, corporate “people,” public organizations, global markets, third world countries, trading partners — as well as the long term realities of governmental spending.

For example:

Invest in nutrition programs for two-year-olds today, and perhaps you will save money in 10 years (less special education requirements) and 20 years (better employment and less crime) and 60 (healthy eating habits means older citizens require less medical help).

Take money away from programs meant to encourage community support and sex education for teens, and perhaps you will be spending more in five years (health care for pregnant women and infants) and in 20 years (when their children reach adulthood; statistics show children born to teen mothers are more likely to unemployed and to be teen parents themselves).

When a family is low on income, it makes sense for it to cut spending (but not at the expense of its weakest members). When a government is low on income? That’s when it should be spending the most, to support those weak members of the society and to invest its citizens with wealth to spread back to the government.

The best way to “create wealth” in an economy is to make sure all members of the economy feel safe enough to take risks, from buying homes to spending for education to starting new businesses. This can’t be done by pulling the safety net away.

The government simply has a higher order of responsibility than a nuclear family, not just to pay its bills but to maintain an ordered and fair economy. With unusually high unemployment, the new norm in many families is disorder, distress and chaos. Washington has a choice: make its citizens feel safe with jobs, social services, health care, and other spending, or face growing resentment and panic among Americans.

Note: Historically, GRS doesn’t do politics. Gilbert feels strongly about this issue, and is willing to take the heat. As always, it’s fine to disagree with her and your fellow readers, but please do so respectfully. Keep the conversation civil and everything will be cool.

Addendum: Thanks for a civil, stimulating conversation so far, everyone. And no worries: This article is an exception to the rule, not an indication of wholesale changes to the site. Finally, here’s a recent post from my friend Adam Baker about what we can learn from the debt ceiling debacle. It takes the opposite view from Gilbert’s article.

There is the first one, a philosophical one, which states that the government is capable of, and should, have, a large role in the economic life of the country (welfare, government-run infrastructure vs. privately owned).

That is a philosophical argument, and does not belong here.

The second argument is economic – it is that the borrowing of money by the government will create economic growth. This is what I call “cargo-cult Keynesianism”

If the government raises taxes, that merely takes money out of the hands of private spenders and puts it in the hand of government spenders, thus causing no net change in spending.

If the government borrows or prints money, that injects money into the economy now. You’d think that creates growth, right?

Wrong.

At the same time that the market is responding to the benefits of free money now, it is responding to the drawbacks of having to pay that money back in the future. Investors will then make decisions on if and how many government bonds they will buy.

One might think the government has a “higher calling”. That’s your business. It’s not the business of the Saudis, Chinese, and Japanese – and if you haven’t noticed, that’s who is funding the US government nowadays. They don’t particularly care if US citizens “feel safe”.

What they care about is getting a return on their invested dollars. They will only do so if the US economy grows enough to pay back the newly accumulated debt.

In this, it is identical to personal finance. Borrowing money when you are poor to go to med school is a great investment. Borrowing money when you are poor to go to Vegas is a horrible investment. That’s why you can get a low-interest bank loan for med school, and you have to get a high-interest credit card to go to Vegas.

And this is the entire point of austerity programs – to cut back on the spending that is not economically productive. You may, based on your personal philosophy, believe that such spending is socially or morally productive.

If the central bank of China, if the Saudi government, does not believe that this spending is economically productive, then they will stop buying US bonds, and then the whole house of cards comes crashing down.

In the long run, no one, not even the US government, wins an argument with the market.

If the government raises taxes, that merely takes money out of the hands of private spenders and puts it in the hand of government spenders, thus causing no net change in spending.
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I think you will find the Keynsian argument is that its taking money out of savers hands and in effect forcing them to spend. ie. It’s about the government forcing people to spend.

The problem with debt, is that its a choice. Spend now, cut the same amount later, with the interest, from spending later. Those advocating the use of the government credit card forget to tell you about the sting in the tail.

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It’s not the business of the Saudis, Chinese, and Japanese – and if you haven’t noticed, that’s who is funding the US government nowadays

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Actually, not that much of it. The vast majority of the funding is from US citizens. They are paying contributions for their pensions, and the government is spending it, not investing it. I presume most of those will want a pension when they retire.

That’s why you get people blaming longevity. The real reason is that governments don’t have investment funds for their pensions. They are ponzis (The US government as written itself an IOU for its debts. Think that one through. I owe myself 10 million – Brilliant, I now have an asset of 10 million, I must be rich – problem solved)

Liberal and conservative economists usually provide sources and some quality of analysis in their arguments, but when it comes to lay men like us, the leftist economic policies usually involve science and theories, whereas the conservative offers reason and good feeling. Something I’ve noted and noted while running down the comments.

Bravo on the user feedback! I was fascinated by this article (and comments) as I think it perfectly illustrates how out of touch everyone is with the concept of 14 trillion dollars. When I say “out of touch”, I don’t mean “ignorant”. I truly mean people can’t grasp that number. It’s mind boggling. The only positive here is that at least everyone in our country would agree that the #1 issue right now on everyone’s minds is our debt.

Stories that compare a family’s finances to those of the government seem fine to me. They make it easier to relate for the common American. I’m not sure what the fuss is about. Perhaps those that are getting upset don’t want to accept the fact that like a family in deep debt, we have to make some tough decisions. The absence of making a decision today will only amplify our problems tomorrow. This is not a right or left problem. We used to be able to make meaningful decisions as a country, regardless of political affiliation.

For example, when we were in a recession in the early 90′s, Bush Sr. made a tough decision to increase taxes (a Republican!) as that was needed at the time.

In the late 90′s, Clinton (a Democrat!)balanced the budget. Wow. I’ll let that sink in for a moment while you read again.

Today, we’re a bunch of can kickers – the party in power does what they want to do – and as a surprise bonus – they don’t even pay for it!

In the early 2000′s, we cut taxes. Fine. I like tax cuts. But then we decided to enter into an expensive war. OK, uh, shouldn’t that have been the time to roll back the tax cuts? I mean, if something is important enough to go to war over, shouldn’t it be important enough to pay for?

Then in 2009, the biggest issue facing our country was unemployment. So what did we do? Enact expensive universal healthcare legislation that is unsustainable! The best part was the program was sold to Americans as “budget neutral” which is simply laughable.

The point of my comment is not to rile everyone up. People that don’t want to have taxes raised are going to have to sober up. People that don’t want programs cut or entitlement programs radically changed are going to have to sober up. Someone is going to have to be the head of the household and tell the family we’re not going to Disneyland for Christmas this year. Time to make a pot of coffee.

This is an article about economic theory. Yes, it is explained in personal terms (family metaphor) and it uses the current political climate for context, but if you don’t like what it says about economics please respond with an alternate theory of ECONOMICS. Not an alternate POLITICAL theory.

I for one found this explanation of austerity fun to read and easy to understand. Thanks Sarah!

It’s incredible that an economic theory presented like this immediately gets a response of “THAT’S TOO POLITICAL! TAKE IT DOWN!”

This isn’t politics. It’s simple economics. Yes, it is ONE theory of economics, and I agree that it would be nice to see a contrasting theory. But I wish people would quit crying to see it removed because they don’t want to “debate politics,” which is considered not fit for polite conversation.

If you can’t discuss economic theory on a financial blog, then what the *hell* is the point?

I’ve been a long time reader of GRS, but have yet to provide any comments until now. If anything I think the reactions show the political divisiveness this country is going through and its unwillingness to work together to solve our difficult issues. Look at how quickly people become angry and insulted over something as simple as an article. Rather than having a logical, rationale conversation on the merits of this article, some are willing to just stop reading GRS altogether. I agree with Reggie, above (#65), that a good article or series of articles presenting factual positions about both sides of the coin is a better way to approach this deep of a topic.

Regardless of political affiliation or personal beliefs – this is an American problem that we must solve together. Countless generations before us have given and sacrificed so that tomorrow would be better for all. I think that same willingness and determination is missing today, but I do think it can be restored. Oftentimes it is not until we are at the precipice of disaster that we are ready and willing to act. I believe in America and her people, and am confident that in the end we will get through this and figure out solutions to our most dire issues.

The article was an editorial mistake on JD’s part. There is interplay between government spending/taxation and personal finance, as any change in taxes or market stability will affect my personal finances, but how to handle that discussion without it getting intensely political is beyond me.

Other topics, like Social Security or unemployment benefits, for example, also impact personal finance, but they are at least one-degree removed from the political epicenter and people can be more objective about it.

The first tenet of JD’s personal finance philosophy is “Money is more about mind than math.”

from the article:

“The best way to “create wealth” in an economy is to make sure all members of the economy feel safe enough to take risks, from buying homes to spending for education to starting new businesses. This can’t be done by pulling the safety net away.”

I think this is the main point of the article. The assumption is that right now people aren’t spending. People aren’t taking risks. Is that true? I don’t know.

I also would love to see well written articles on economic philosophies.

Its a little more complicated than that. The savings rate in the run up the recession was negative, ie: the average person was spending more money than they earned each year. So everyone was running up high debt loads, including corporations. Post-recession, the debt still exists, but the value of the assets securing the debt has dropped considerably. So corporate and personal balance sheets look awful. Thats why people and corporations have been hoarding cash and paying down debt for the past two years. Its also why low interest rates arent really helping. Eventually everyone will feel comfortable enough with their balance sheets to start normal spending again, but who knows how long it will take.

I do not understand why anybody would want to pay interest on anything. It seems to be lost money to me. It really means that one has not resolved the inner issues on wanting and believes that something outside of you can make you happy. I believe that to be true the same for personal finance as well as for the Govt. So i can see no reason to pay another country anymore than i would pay the bank.

So i would advocate Dave Ramsey’s approach or the one from Debtors Anonymous, being Debt an Addiction, a Disease of lack of impulse control.

The government is most inefficient in economizing. Our government was not created with the idea of taking care of all the ills of society. It was created to make a free society to allow people to create their own wealth. The success of the U.S. for the last half of the 20th century was due to the rest of the world economically wiped out . . . not because our government was super efficient.

You know what’s funny? Statisticians claim that Americans are less in consumer debt than they’ve been since the early 90s: http://www.federalreserve.gov/releases/housedebt/. Obviously, some people are defaulting on their debts, but statistics show people are also just spending less and paying off their debts (how many desperate credit card offers have YOU gotten lately?) So, when everyone starts getting fiscally responsible at once– in fact, when the majority starts trying to Get Rich Slowly by spending less, there’s less demand.

If I’ve been following what my economist friends are saying, Demand side economics says that’s going to cause the economy to contract. So what does supply-side economics say?

Very true. Its not just people though, its corporations as well. Both individual consumers and corporations have been hoarding cash and paying down the massive debt loads they incurred from 2000 to 2008. This is why the recovery has been so slow. People are afraid to spend money because of the threat of future hardship. Corporations arent sure the recovery is here to stay, so they hoard cash in a wait and see approach. Eventually they will start spending again, but its interesting to see the psychological effect the downturn had. Similar, but smaller in scope, to what happened to the depression generation.

Oh boy… Im not even sure where to start with this article. Its as if the Ms Gilbert doesnt think a problem exists with the current budget, and that record high deficits dont mean anything in the long run. Almost… like… we wont ever have to pay it back?

The current deficit levels are unsustainable. This is not even debatable. It is fact. Her solution seems to be ignore the problem and hope it goes away. Historically, that solution has worked out well. /sarcasm

The republican hate mongering in the article is also very disturbing. Im not big into tea party politics or any of the other nonsense, but lets remember that the democrat lead congress has increased spending a good 20% above what existed prior to the 2008 election. Cutting spending back to 2007 levels would be a good first step in rectifying the unsustainability of our fiscal policy… Unless you just want to stick your head in the sand and hope the lion doesnt see you.

In any case, there are three courses of action the US govt can take.

1) cut spending
2) raise revenue
3) do nothing and end up in default at some point in the future.

The writer of the article clearly leans toward #3! Amazing.

Writing about current events is good. More people should be aware of what is going on, but this article was pure hackery, and doesnt help uninformed people to make better political decisions in any way.

Im very dissapointed that someone as educated and well travelled as Ms Gilbert would write such an article.

I decided long ago never to vote for representatives with “good ideas”. I vote for men/women of integrity who will uphold, support and defend the constitution which they swear an oath to do!

There’s a general lack of knowledge concerning these founding documents. Ask most 20 somethings with a college ed. about the constitution. Most have never read it. They’ll usually say, “it isn’t as relevant in today’s world…” or something to that effect.

Have we forgotten the proper role of gov’t? Read the first paragraph of the constitution! It states the purpose of the document and the gov’t being established!

In my opinion liberty is key. Liberty allows freedom to fail…as well as succeed. So I work my best to succeed, remembering all work is noble! If I fail… well I give up cable TV, cell phones stc. I might have to live with family, drive a beater car, grow a garden, wear goodwill clothes, etc., until my circumstances change.

In the gov’t it would look like Getting rid of all programs/Depts/services that can be better implemented by states. I think we call that the 10th ammendment. Simply … SIMPLIFY!!

Unfortunately we have a generation who thinks gov’ts role is to provide from cradle to grave.

There are many good answers to our problems. The Federal gov’t needs to do what it is constitutionally mandated to do. Not one speck more! Leave the rest to the states. We have a louder voice within our state. If you don’t like the policies adopted it is much easier to remedy. Plus you have 49 other choices of places you could live!

I drive a 94 car with over 243,000 miles on it and plan to own it for a million miles. Just finished doing my timing belt and all other belts. And no leaks on oil pan unlike what happened after I took it to dealer for repair. I just bought an engine stand today for 30 bucks so that when I need to pull the engine and overhaul it I can. Of course my finally fedupwithsupportingtheeconomyviadealerships prompted me a retired mechanic to go my own way. I realize the economy would fail if everyone did this but I am looking after my bottom line not the economy. I agree the author of this article doesn’t back it up with facts. Governments exist to grow at the expense of the person paying the taxes.

Sorry, I don’t care how deeply someone cares about this issue, there is NO excuse for running this column in GRS. If Sarah Gilbert feels that strongly then let her write her opinion somewhere else where it is appropriate.
You screwed up. An apology would be in order.

Hmmm… I’m in full support of this article, and hope to see more like it, but I have to disagree with you.

A small business owner does how his customers something – common courtesy. If s/he has offended them, then s/he should apologize.

Sure, we’re all free to say whatever the heck we want. But by your rubric, if JD posted a hate speech about why black people are poor because they’re lazy, he wouldn’t have to apologize to anyone. I disagree.

I’m not saying JD should apologize for this. I’m simply saying it’s perfectly valid for us to ask him to CONSIDER whether this article crossed a line, and if he thinks it did, to apologize.

Darn it! I meant “a small business owner does OWE his customers something”.

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Brentonsays:

26 August 2011 at 9:05 am

I think racist hate speech would fall under the slander category. You can always make up ridiculous scenarios and play the what if game, but the fact of the matter is that the article posted wasnt terrible and no one should be given an apology because someone else disagreed with them. The idea is in direct conflict with the idea of a representative democracy.

Okay, folks. I’m about to be out of internet-land for a few hours. I’ll try to approve comments from my phone. In the meantime, please continue to keep things civil and interesting, as you have all morning. (For which I thank you!)

~chuckles~ and while I love the gardening project, being a gardener who saves money by growing the organic food her bottom line cannot afford…

i tend to ignore the retirement investment articles because, well, you don’t know what will be around in 50 years. All the great advice about real estate and 401ks etc. didn’t help my dad any this year at retirement…he lost half of it in ’08.

Just like my grandpa lost his investments in CDs (after a mild boom 2000 to 2008 then back to zero interest),and relying on union pensions (grandpa is 95 and still kicking pretty strong and independent…but his CDs aren’t and the pension died when the manufacturer moved overseas in the 90s), my other granddad lost out on Railroad stocks (the HOT PICK of the 1920s, will always go up), and my great grand on agricultural shares/subsidies…farming by government. Government owns what used to be the family land now.

Whatever they ‘tout today, is a boom likely to bust by the time you need it. I’m sticking to goldbugging.

In some ways, there is a similarity between government and families. If I just cut my expenses without though as to the repercussions I will have long term problems. For example, I could cut my groceries and eat rise and beans, but in the long run I will pay for that choice nutritionally. Government and families need to cut expenses in a smart way and understand the repercussions of their choices. Cutting education today will come back and haunt us 5-10 years from now.

Also both a person and a government needs to apply their priorities and values to their choices of what to spend on, and what to invest in.

If only our government would spend money on (or reserve their taxes discounts for) opportunities that will create jobs and support a culture that respects it’s citizens! Small businesses are the job and cash flow engines of our country.

You got it wrong sushi. Government exists to grow no matter how much money they take in. Money is already funded for road repair via gas taxes, but most is spent on administration of the funds. Case in point. A major state univeristy I worked at budgeted 10,000 dollars to overhalul the chemical sampling station at a cogen powerhouse on campus. But buy the time planning spent all the money planning the job the money was used up. They could have instead paid the money to the workers at the powerhouse to buy and make the repairs on their own with an overall savings in the budget. This happens 99% of the time. Like I said, government exists to grow not shrink.

I’m just one reader so maybe most people dig this stuff, but the huffington post is readily available to me if want to read about this predictable, liberal perspective on government spending. The debate might be valid – but I read this blog to get insights into personal finance, not read yet another dressed up article saying the exact same thing regarding welfare and entitlements. Just my $.02.

Great piece! I, too, have been a longtime GRS reader, and only now have felt compelled to respond.

Two thoughts:

One, thank you for your research into the Jamaican and Barbados economies. Funny. I’ve been in awe at how prices of everything in the US – cell phone charges, cable, utilities, oil, real estate taxes, food, clothing, gas, EVERYTHING – have been rising much faster than pay rates and salaries. It’s baffling how on a micro level, individuals and families are having a harder time covering increasing expenses with their incomes, but businesses can simply raise prices (which individuals and families have to pay) to cover their increasing expenses. A circular phenomenon that, for the life of me, I can’t make sense of. Consumers have to hold their budgets steady, but the producers of goods and services don’t. It’s no wonder our economy is not moving forward – we’re too busy chasing our tail. Wouldn’t it be nice if, within our capitalistic, Darwinian system, we could experiment with the Bajan model of EVERYONE – including businesses – having to hold steady for a period of time so that we can all get our bearings?

Two, while I think your comparison of government to, and differentiation from, a family is spot on, I think the validity of your argument relies completely on a premise that the “weakest” members of society – children, the elderly, the mentally ill, and the poor – are “weak” through absolutely no fault of their own. A premise that many people would disagree with. (Personally, I have absolutely no idea where I stand on the issue. I’m still trying to figure it out.)

Depending on who you ask, how you were raised, what your moral values are, your own experience in or with poverty, etc., poverty can be a condition of choice (you have the ability to choose NOT to be poor, as shown many, many times by people who grew up poor, or fell upon hard times, but did what they had to do to work their way out of it), or circumstance beyond one’s control (e.g., a medical illness unexpectedly wiped out a family’s assets). Blame the victim v. blame society. And many people – blue and white collar, of little, modest and many means – feel that it’s unfair to continue expensive entitlement systems when many draw down on it with an unearned sense of entitlement to a temporary (which for some, turns permanent) helping hand. AND when we’re ALL now in an economic bind.

To use your family example, some find it unfair to argue that Brother, who made some bad choices in life and is living at home because his criminal record and/or drug history make it hard for him to find a job, and who has 2 toddler children that he’s having a hard time financially supporting, is entitled to any support from the rest of the family if he’s not busting his bum and doing his part like the rest of the family.

Again, I’m not taking one side over the other. Just recognizing that the premise that the most vulnerable members of society are, in fact, entitled to help is itself up for debate.

I would say this post has more of an ideological bent versus a political bent. As I read it, I sense an underlying belief that the government should provide a specific level of social services. I don’t necessarily agree with the poster as to where that line of government versus private responsibility lies. However, I would agree with some of the other comments that posting a viewpoint from another perspective would balance out and truly reflect that this blog is interested in ideas and not necessarily the spin associated with them.

One of the central problems with all of this discussion is that families, businesses and government all use different accounting systems. Most families account for their finances on a cash basis, how much money came in and how much went out. Most, not all, businesses use an accrual system. And government uses its own system.

By business standards, its doubtful government is taking in less than it “makes”. How much appreciation in value is there every year on all the lands, buildings, dams and other public infrastructure?

A business would consider that appreciation as income and wouldn’t count the cost of the purchase as an expense at all. It would put it on its books as an asset. It would only be an expense when it fell in value.

A lot of families, wrongly, considered the appreciation in their homes as income. They certainly didn’t see themselves as spending beyond their means just because they needed a mortgage to make the purchase.

Government budgets, by contrast, look at how much they spend versus tax receipts. All purchases are costs at the time they are made, regardless of how long something will be used or what happens to its value afterward.

The point is, we don’t budget government like a family or business. And no one is really seriously suggesting we should. The comparisons are just demagoguery.

The comments make for interesting reading. To the extent that they wouldn’t have been made without the article having been published, I think the article has been useful.

I enjoy reading economic and political analysis and opinion, particularly related to the current economic situation in the U.S. and other countries. The Economist, Bloomberg, WSJ, and the list goes on.

So I got excited when I saw the title of this post, because I expected to see a discussion of the government’s revenues and costs, and how those compare to an individual’s — a compelling premise for an article that would touch on an issue on many people’s minds, while tying it sensibly to the core topic of GRS.

This post, however, didn’t deliver that. Rather, it felt a lot like a lot of the Paul Krugman NYT Op-Ed pieces that have come out over the last couple of years (since the financial crisis).

I have no plans to stop reading GRS, and I’d even enjoy more articles that touch on world economic events… but they should do so in a way that includes practical application to personal finance. What’s the takeaway from this article that is going to lead to me doing something that will/could lead to an improvement in my personal finances?

Everyone is always so afraid of “deflation”. I can’t understand why. If prices came down to a more reasonable level for things, I’m sure people would start buying more which would lead to more manufacturing. This should create a similar effect as what happened in Barbados.

Why does Ben Bernake want inflation and say that it is good. Also lie that its 3%, its way more then that. So many companies reduce their packaging qty by 25% but keep the same price. People buy less of everything and close their wallets.

The reason people are afraid of deflation is that people are rewarded for putting money in their mattress and delaying purchases, rather than investing the money or buying things. That’s because the longer you wait to spend the money, the more you can buy with it. That discourages economic activity.

- I must agree with some other readers that the new pop out side bars on the right side of the site are irritating and add little value for me. (Maybe someone likes them?)

- I am glad GRS is trying to address the political impact of Government policy making on PF. I don’t think this article handled it well though and I would like to see a better job of representing both viewpoints. Someone mentioned something about the real life impacts to citizens of many of the proposals being kicked around in DC and that information (with cited sources) would be incredibly informative to people trying to plan their PF.

- I cannot fathom how someone could be so offended by having to read an opposing point of view that they wouldn’t want to come back to the site. I have friends on both ends of the spectrum and always try to keep an open mind. The failure of people on both sides in the US to listen to what the other side has to say is why we are in this mess. People are screaming at each other and no one wants to listen to that. The one thing this article did right was to highlight the consequences of Jamaica not pulling together as Barbados did, unfortunately there are not nearly enough facts/information to support the example provided. Additional examples would have helped flesh out this viewpoint.

- I am very glad to see there was a very civil and informative conversation as the result of this post by a lot of parties obviously more informed on the subject than I am. This is why I come to GRS. I am very glad to read other viewpoints as they only serve to expand my own (limited) experience in many areas. Please don’t let the responses prevent you from posting more articles in the political vein. With that said I think you can approach this from a much better angle.

- Politics and government policy making is critical to how we plan for our own retirements. All you need to do is look at the government controlled Chinese economy to see this. Failing to follow up on this with more (and better) articles is really a disservice to all of your readers.

I think that there is so much frustration among us (evidenced by the comments) due to the fact that most of us have no control over what the government does. Sure we can vote, but is either side doing their job? I think for most of us that answer is a resounding NO.

Instead of acting out in this manner I think we would all benefit from a post that details what will happen, one way or the other, and how we can choose to respond to get ourselves through.

I don’t mind the political bias in this post, but what I do mind is the idea that there is a ‘right’ way which the author and JD clearly believes there to be.

This post wasn’t political per se, it was about the economic realities in which we work, live, invest, and (hopefully) prosper.

The problem with extremist political rhetoric is that it blinds people to economic realities for the benefit of interest groups. And in truth, most apolitical economists agree that the current budget cuts will not bring prosperity but will slow down recovery instead.

When you work in the present and you plan your future, it’s important to understand the economic environment in which you operate, whether the truth is painful or not.

Burying your head in the sand about political and economic realities will not help you be great at personal finance.

While this is a nicely-written article it is completely devoid of facts. It’s a feel-good opinion piece. And while most of us do know that a government is a bit more complex than the family checkbook, there are some principles that are set in stone. One of those principles is that you cannot continually spend more than you are taking in. There is no way that system works and lessons from the U.S.S.R. to Greece should be blatant reminders.

Facts? In the year 2000 the U.S. Department of Education gave funding to the States of more than 5 Billion dollars. By 2006 that number was roughly 11 Billion.

In the year 2000 the federal budget was $1.8 Trillion Dollars. This year (2011) the federal budget is 3.8 Trillion. We’ve more than doubled the federal budget in a decade. The federal gov’t does not do twice what it did in 2000 nor should it.

This is a “feel good” article that fails on the facts. I would love to have this discussion in front of an audience and project the actual numbers. We are spending at an absurd and unsustainable rate. And, yes, that is a principle that a family checkbook and the government checkbook do have in common.

And whenever anyone talks about where to “get more money” it is always the other person’s pocket they seem to be staring at.

Love this post. It’s well thought out and presents its arguments clearly and convincingly. It’s sad to see people claim that it’s political when all it’s doing is presenting basic macroeconomics. And it’s ridiculous to assert that you should “present both sides” when the one you present is based on solid empirical backing and the other is just voodoo which has been proven time and again through the events of the current Great Recession.

I’m not going to comment on the content of the article. However, it is a good question, should Get Rich Slowly have articles that address the impact the government decisions have on personal wealth? Regardless of how we (as US citizens) got here, our country has a big problem with both deficit and trade balance. Ultimately there will be corrections which will effect everything from future tax rates, expected benefits, and services. Changes in the global economy (and our government’s response to that economy) also affects individual people economically. I don’t want this blog to become a political blog. But to not mention these issues, and not discussing possible solutions to these problems also seems like sticking one’s head in the sand and pretending that these macro effects have no effect on micro (individual) wealth seems silly.

I am a CANADIAN. We had a big deficit a few years ago and lost our AAA rating. We have since balanced our books with no cuts to social services. The u.s elephant in the room is military and internal goverment spending. How about reducing duplication of services in all your law enforcement agencies? Cut NASA?

Thank you all, for your passionate and nuanced responses to this post. I apologize that I don’t have time to respond to each comment individually — and I feel I should apologize to J.D., who stuck his neck out to post my opinions .

Someone pointed out that I left the other side of the equation — tax increases — out of my argument. I left a *lot* out of my argument (due to my desire not to go on for a New Yorker’s article-worth, I decided to limit the discussion of economic solutions to the austerity principles alone), and one of those things was tax increases, which I do also agree with (I was interested to hear the other day that our tax rates have fallen considerably since the Reagan era — perhaps a return to those tax rates would generate the revenue required for today’s needs). Another is corporate subsidies of just about every sort. I don’t agree at all that corporations would flee the U.S. if charged more taxes (I’ve heard a few discussions of this on the famously liberal NPR, and they were quite balanced and I saw more reason in the group of economists who believe corporations would stay put). There are several other strategies I’d use if I were running the government — but, of course, I’m not, and some of my ideas are even controversial among a liberal audience.

Also, I’d like to counter the argument that social services spending is ill-advised because of the fraud among recipients of such services. Yes, I’m familiar with this argument and, indeed, I have known many who have taken advantage of the system. I’ve known more than one able-bodied person to receive disability payments (seeing them come back from the gym is galling indeed). I have a couple of in-laws who collected unemployment while not once, not ever, looking for a job. I know a woman — in fact, her girls lived with me for a couple of months — who was very clearly more skilled at receiving services and checks for her children than she was at parenting them. I still support the programs, though — because I believe a civil society needs to protect its weakest members, and I don’t much care why or how they got into that mess, aside from doing all we can to prevent future messes. Rules and restrictions governing payday lenders is, for example, one such measure. The more ordered and nurturing a society, the less we’ll need such services. “Protection” is probably the wrong word (I don’t know if I or someone else used it) — I think “nurturing” is more appropriate. (This is how I parent, too. The more you trust and nurture and create order for children, the more they’ll grow into self-assured, accomplished, compassionate adults. I think it works, though others to whom I am related would probably argue vociferously against my stance.) I recognize that this is an unpopular argument, but I also believe it’s correct.

Finally, I would just like to point out that nowhere did I demonize Republicans, nor did I say they hated the poor, and in fact those who disagree with my economic arguments are both Republicans and Democrats. And the Libertarians would *hate* it (I know, I once dated a Libertarian — although actually I agree with many of the ideals of the party). Of course, if you were to read any of Newt Gingrich’s remarks, you’d be sure to believe the Republicans hated the poor — but policies from politicians in both parties have been virulently anti-poor and pro-rich, so I hardly believe my arguments can be called specifically anti-Republican. Anti-Washington; I could own up to that one.

I am challenged by your comments to write a post detailing the arguments *for* debt reduction at all costs. I’ve heard some very interesting ones (on NPR, amazingly). we’ll see if J.D. decides he’d like to publish something like that — it would be a worthy exercise in my ability to write through my clear bias.

I disagree with this post completely. What this post completely ignores is the economic reality we are facing. We (as in our country) currently borrows 33 cents out of every dollar we spend. Our debt to GDP ratio is at 100% – most economists consider 90% the dangerzone. There are other developed countries with higher ratios than yours – but you would talking about countries like Greece, Ireland, Italy and Spain.

We cannot keep acting like there is no future. We are digging a hole that it may take generations to dig out of. How can we do this to those that come after us?

I don’t think the article was too much political, it was more editorial in nature. I think it sparks some different ideas in how we can think of our government.

I totally agree with the whole jobs corp thing. If people had to actually work for their unemployment, we would have a lot more people with jobs and fewer people on the government’s payroll. 90% of the people I know on unemployment have had at least one job offer that they haven’t taken. They make better money on unemployment and don’t have to work. I think we should have at least a minimum of 10 hours of volunteer service as a requirement to receive unemployment. Anyone can send out a couple resumes online and say they are “looking” for a job.

I also agree that we do need to support people who don’t have any other options, children, elderly, etcetera. However, we can make changes to our antiquated programs that help save money and help more people and prevent waste. If I were receiving food stamps and WIC, I would get over $400 more per month than what I currently spend on my family. If I weren’t married, I would actually get paid to work (instead I pay the marriage penalty). I bet if you set up a reward system for people who turn in companies for medicare fraud, you would save about $1 billion.

Hi everyone, I have read most of the comments on this post and would like to add my two cents worth.

As an American citizen you have the opportunity to elect a government official to represent your best interests. So when the country is not doing so well, when the opportunity arises, vote someone in whom you think will make a difference.

Most politicians come into politics for good reasons, to serve their constituents and the greater community. If you are not satisfied with their representation, why not try running for office yourself on a local scale to start with?

I believe that most developed countries that are having economic issues would benefit from higher taxes and greater government spending.

The government could then make sure that everyone is taken care of. Why do unemployment payments run out? Why are there American citizens in poverty and living in tent cities?

America is supposed to be the land of the free and the home of the brave. But realistically no-one is free, you have to pay taxes of some sort (sales tax, income tax etc etc). What is free about someone in your family getting cancer and you ending up in bankruptcy just so a Health care company CEO can make another few million dollars?

I believe that if people work hard they deserve to keep the majority of their money. If people can’t afford to eat, can’t afford to educate their children in university, can’t afford to get sick and you know they work hard, why wouldn’t you feel the need to help them out. I’m not talking about charity, an increase in taxes and government spending should reduce the number of people that need charity.

I also believe that the majority of people do not want to rip off the government or social security. There will always be people who break the law and have some excuse. But they are still breaking the law.

“What is free about someone in your family getting cancer and you ending up in bankruptcy just so a Health care company CEO can make another few million dollars?”

I think people have answered this one quite clearly – as long as it’s someone else’s family, THEY DON’T CARE. That family needs to take care of its own problems. In their minds, they don’t want to pay to take care of others’ problems.

Your point that:

“an increase in taxes and government spending should reduce the number of people that need charity.”

is SPOT FREAKING ON. But people in the US can’t get past the idea that people getting “entitlements” made bad choices in their lives, and should have to suffer the consequences. Maybe it’s that Puritan streak kicking in? I dunno.

All I know is that they never get to “reducing the number of people on charity” because they don’t think those people deserve charity in the first place. It’s this moralism that totally interferes with what’s most practical.

I have been following GRS for years and I don’t comment very often. I believe this subject of comparing government budgets vs family budgets can be discussed in a mature manner. However, presenting this subject from such a bias emotional and political point of view generated more distraction than value for me.

The comparison of recommendations of cutting spending on entitlements is nothing like taking away junior’s food and clothing when dad looses a job. The leading recommendations for spending cuts to entitlements are not suggesting taking or cutting grandma’s SS check. This analysis is an emotionally charge stereotypical liberal talking points response to any mention of entitlement reform.

Please stick to personal finance or at least a more neutral presentation of political charged subjects. Otherwise you can count me in the ranks of the former readers.

I whole heartedly agree with Hank and he made my point better than I could have. I come to GRS to gain information on Personal Finance I do not come here for political discourse. If I wanted to read the NY Times Editorial Page I would subscribe to that paper. Please stick to what you are good at and leave the commentary to the NY Times, Wall Street Journal, Washington Post, etc…

In Macroeconomics I remember the first thing they taught was the concept of scarcity and how people need to make trade offs. We’re so privileged but the truth is even wealthy countries like the U.S. must make choices.

JD: Thanks, I love your site. Please continue to do as you wish concerning content.
However, I am saddened by your readers that posted comments about this article. The majority seem to be partisan sheep, unable to attain perspective and fully of the belief that, what they think, IS who they are.
Humans, please close your eyes. Tell me what you see ON EARTH in 500 years. Is everyone fed and healthy? Is everyone educated and employed? Is the air clean and the water clear?
How will this happen if we do not begin to change the basic nature of the machine.

Most of humanity will be reduced to a population of half a billion people a la the Georgia Guidestone inscriptions:

Maintain humanity under 500,000,000 in perpetual balance with nature.
Guide reproduction wisely — improving fitness and diversity.
Unite humanity with a living new language.
Rule passion — faith — tradition — and all things with tempered reason.
Protect people and nations with fair laws and just courts.
Let all nations rule internally resolving external disputes in a world court.
Avoid petty laws and useless officials.
Balance personal rights with social duties.
Prize truth — beauty — love — seeking harmony with the infinite.
Be not a cancer on the earth — Leave room for nature — Leave room for nature.

Long time reader, not infrequent commenter,has some things to say.
i like the IDEA of the article. I like that we do need to make a connection for people between their financial future and the government’s decisions. Unfortunatly – I don’t think it delivered. What is scary for me is that as a society I see us sliding backwards. I see that corporate responsibility is dwindling, and as a result people mimic what they see magnified in the media. Because the news showcases the 1% bad stuff (to borrow from the Harley Davidson riders) people tend to believe this worst of all scenarios – and it pushes the odds further. People think – everyone else is abusing unemployment – why shouldn’t I? Or, the federal government only worries about making it’s monthy payment why should I look further in my balance sheet? There is no risk for making risky decisions. Right now I see our world polarizing. There are the ‘fiscally responsibly’ type. Who only spend what’s neccesary, who save and cut back when times are lean. Then there are the ‘fiscally unresponsible’ the ones who live paycheck to paycheck, who spend a bonus before it’s recieved, who only worry about monthly payments instead of total cost,
who buy all the CRAP that walmart is selling at the cheapest price.
The problem is those in the first camp start to feel more and more like ‘suckers!’ when there are no repurcussions for being in the second camp

Socialism, which you propose, has never worked. Just look at Greece as a current example of what happens when people expect the “government to take care of them”. I do not agree with your position. If you have ever read the book Whatever Happened to Penny Candy by Richard Mayberry you will understand why our economy cannot be based on a “Robin Hood” mentality. A lot of the social programs you mention have not significantly changed our society for the better. If this is where this blog is going, I do not wish to subscribe in the future.

Our government CAN reduce spending very simply: cut out foreign aid; move the United Nations to France so they can support it; remove our military troops from Europe and let them pay for their own defense; pull our troops out of Afghanistan and Iraq; stop supporting abortion mills like Planned Parenthood who claim to provide health services but only provide birth control pills and abortions; stop support for NPR and Public Television (let it truly be public supported); and finally put people on welfare and unemployment benefits to work part-time at least while receiving benefits doing public service work (litter removal; sort recyclables; planting food gardens for poor).

Allow me to be frank for a moment. And let me also preface by saying this is my stance and may not necessarily reflect that of the GRS staff. Whether you want more “quasi-political” articles or you want them to be cut off altogether, I really think the underlying issue here is that (and this is going to sound harsh) it doesn’t matter. This is not your blog. While JD and his staff are overwhelmingly generous enough to listen to fans of the blog and tailor content to specific tastes (which is a fine and necessary business practice), they do not have to. The universal acceptance of all tastes and personalization of content is one of the many things that makes this blog great; I am relatively certain none of us want it to become “cut your cable bill!” on repeat. However, unless you like everything ever, it will inevitably address a topic that you don’t enjoy. I would hope that this is pretty well understood because, in the end, this is a free service and they’re free to control the content how they please.

I put forth this analogy: If a phone company were to give you free landline service for years and then one day happen to give you a marketing call on that line (for which they even second guess themselves a few hours later!) would you become angered and demand that those calls stop coming through YOUR phone? I’d think that most would weigh the call against the benefit of the fantastic service and deal. I imagine you wouldn’t drop the service until the phone company began giving you marketing calls daily, which I don’t see happening here (we’re not on the path to HuffPo or Fox Nation here, people).

As you no doubt can tell, I am for the rationale behind the post; my thoughts on the content will remain unsaid. However, I also believe in reaching a middle ground, so I propose a “Spoiler Alert” of sorts. JD and staff: you’re obviously perceptive enough to know when an article may be controversial. To that end, you could place a header right at the top: “Caution: This article addresses [economic/governmental/etc.] topics and may be seen by some as having a political bent. If this is not your cup of tea, please skip to the next article (it has cat pictures!).” Ah, choice! America!

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